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Yuan hits record high on trade data

10/01/2013

China’s yuan surged to a record high on Friday after the dollar slumped against the euro and the central bank signalled increasing tolerance for appreciation amid strong export and inflation data. The yuan opened at an all-time high of 6.2187 versus the us dollar and firmed further to an intraday high of 6.2155 in early trade, a gain of 0.14 per cent over Thursday’s close of 6.2244.

The strong gains occurred after the central bank set its daily midpoint at 6.2712, the strongest fixing since early May last year.

The PBOC’s strong fixing was a response to a fall in the dollar overnight. The euro muscled to a one-week high against the dollar on Thursday after the European Central Bank gave no indication it would cut rates, while robust Chinese export data assuaged concerns about global growth.

China’s export data, which showed the trade surplus rising to US$32 billion compared to US$20 billion in November, also supported the yuan both onshore and offshore.

The central bank typically sets its fixing stronger in response to an overnight weakening of the dollar index, which tracks the greenback’s value against a basket of currencies dominated by the euro.

But traders say that the magnitude of its response at the fixes in recent days also indicates an increased willingness by the PBOC to permit yuan appreciation.

Traders have reported strong corporate demand through late 2012, but the People’s Bank of China (PBOC) used its midpoint to hold the yuan mostly stable since late November.

The PBOC allows the exchange rate can to rise or fall by no more than 1 percent from the midpoint it sets each morning.

China’s trade surplus for full-year 2012 rose to US$232 billion compared to US$155 billion in 2011, the first year-on-year rise since 2008.

Inflation data released Friday morning showed consumer prices rising 2.5 per cent year-on-year in December, up from 2.0 per cent in November.

Analysts say an uptick in inflationary pressures should boost authorities’ tolerance for yuan appreciation, since a stronger currency could help to moderate price growth by lowering yuan-denominated prices for imported goods.

Traders now widely expect moderate appreciation in the first quarter this year, though most believe the yuan is unlikely to strengthen beyond 6.20 per dollar.

Many suspect that major state banks are still buying dollars on behalf of the central bank on an ad hoc basis in order to prevent what the PBOC would regard as excessive appreciation.

Such apparent intervention was clearly visible in mid-December. Traders say it has been scaled back, but not disappeared since then.